Rethinking Directors' Duties, Governance and Regulation

Abstract

Rethinking directors’ duties, governance and regulation is required because US/UK “best" practices have proved to be unreliable, especially in large complex firms. The science of governance explains why. It also explains why simple small-brained creatures can sustain their existence in complex unknowable dynamic environments when organizations governed by large brained highly intelligent humans may not. This is because creatures possess network governance that includes bottom-up and other channels of control and communication not found in US/UK firms. Network governed firms with hundreds of boards have been established in the US, UK and Europe from adopting appropriate constitutions. They provide evidence of sustainable competitive advantages. Cybernetic natural laws explain the impossibility of CEO’s, Boards and/or Regulators reliably controlling complexity with only top down command and control hierarchies. Governance science identifies how formal stakeholder engagement is essential to further the ability of firms to become self-regulating and self-governing so as to minimize the role of regulators while increasing their effectiveness. The paper concludes that regulators should require firms to adopt network governance with stakeholder engagement. This would simplify the roles of directors, CEO’s and regulators and also reduce the size and cost of government to enrich democracy.

Keywords: Corporate Governance, Cybernetics, Directors duties, Network governance, Regulation

JEL Classification: B41, D02,D21, D72, D74, D85, D87, G38, K23